As any investor knows, technology and biotech stocks have surged over the past year, and technology fund manager Duncan Stewart says that if history is any indicator, there are still more gains to come.
"They have had an amazing run," said the partner at Toronto-based Tera Capital Corp. The average stock in those categories has risen about 100 per cent, but typically, tech and biotech stocks more than double following the end of a bear market, he explained.
"From the previous low, they normally go up two, three or even four times," which suggests "at this point, it is likely that we aren't done yet" with the gains, he added.
At the same time, he notes that history shows that tech and biotech stocks tend to be weak in the summer. The pace of drug approvals slows then and tech companies' revenue figures look anemic against the typically strong fourth-quarter showing. And economic activity in Europe drops off dramatically for summer holidays.
Accordingly, he expects that the two sectors will fare well for the next month or so and then possibly correct a little before posting strong increases in the fall and winter. He anticipates that the strength will be evident across both sectors, with one key exception.
U.S. big-capitalization health care stocks as a group are "quite expensive right now," he said. He thinks that group has already had most of its run.
The same is not true for the Canadian small-cap biotech stocks he buys for his fund, the Dynamic Canadian Technology Fund, the manager notes.
While some other tech fund managers have already singled out particular segments within the technology group for special attention in this rally, Mr. Stewart has no such favourites. All tech sectors tend to rise in the early part of the rally, as companies gear up their spending on technology generally; it is only later that the leaders in the technology group usually emerge, he said. He compares the pattern to the 100-metre dash in the Olympics. "Think of coming out of the bear market like the starting gun; in the first 20 to 30 metres . . . almost all of the runners do more or less equally well; it is only in the back half of the race" that the field spreads out, he said.
As his comments indicate, Mr. Stewart is upbeat about the prospects for tech and biotech stocks through 2004 and into 2005. But he is less sure about the outlook for tech stocks and the equity market in general a year from now.
By then, "the natural bounce back will be finished, the U.S. election will be over, there is certainly a chance of interest rate increases, spending cuts -- all sorts of stuff that makes me a little more uncertain than I am today," he said, adding that there could be a slowdown beginning in the spring of 2005.
But that doesn't prevent him from being optimistic about tech and biotech stocks longer term, say over the next five years.
Dynamic Canadian Technology Fund has surged more than 20 per cent so far this year.
Among the stocks that Mr. Stewart bought or has added to positions recently are:
Zarlink Semiconductor Inc. (ZL-TSX). He added significantly to his holding in the Ottawa-based semiconductor company a couple of weeks ago when the stock dipped below $5. The shares have recovered modestly since then, ending Friday's session on the Toronto Stock Exchange at $5.10. He predicts the shares could climb to between $15 and $20 at some point over the next semiconductor cycle, but "at the very least, $10." Over the past 52 weeks, the shares have traded between $3.40, the low set on Oct. 27, and $7.94, the high established on Sept. 9.
Mr. Stewart says that Zarlink stock is "cheaper than almost any equivalent telecommunications semiconductor stock on the planet on a price-to-sales basis," which is how such companies are usually valued. He also noted that the company is in the midst of a turnaround, but it is not yet profitable. It is also not well known south of the border, he added. "The Americans, by and large, haven't caught on to the Zarlink story yet; . . . if they do, all of a sudden it is a $10 or $15 stock."
AnorMed Inc. (AOM-TSX). The Langley, B.C.-based biotech company is another turnaround story, he said, noting that AnorMed has shifted its focus and is now working on chemokines, which are important for communications between cells.
Mr. Stewart describes chemokines as "sort of like the Internet for cells, so being able to control them makes you sort of like Cisco." AnorMed's lead drug is used as part of the process leading up to a stem cell transplant for cancer patients, among other things. The drug is designed to increase the number and quality of stem cells available for re-injection into the patient after his immune system is depressed by chemotherapy and radiation. Data from Phase II trials look "incredibly encouraging," he said. The market for such a drug, which could be used by patients with multiple myeloma and non-Hodgkins lymphona, for example, is potentially very large, he said. He also likes AnorMed for its strong cash position and because its stock is only now being discovered by U.S. investors. The shares are currently changing hands at $7.75, but he sees them possibly rising to $12 or $14 a year from now if things go as he hopes.
Genus Inc. (GGNS-Nasdaq). The Sunnyvale, Calif.-based company makes tools that allow coatings as thin as one or two atoms to be placed on semiconductors. "They are one of the two companies in the world that are really good at this," Mr. Stewart said. Although Genus is a U.S. outfit it is a small-cap, out-of-favour issue and is largely unknown by U.S. investors, he said. He is impressed by the company's management and says the stock is a "tremendously undervalued semiconductor play at the early edge of the adoption of a new technology." The shares closed yesterday on the Nasdaq Stock Market at $3.67 (U.S.). He predicts the price could go back to $7 within a year. The shares hit a 52-week high of $7.50 on Dec. 1. The 52-week low of $2.17 occurred a year ago.
In a Nov. 14, 2002, Best Bets interview, Mr. Stewart mentioned GSI Lumonics Inc. (LSI-TSX) and Creo Inc. (CRE-TSX) as well as Zarlink. He still likes GSI Lumonics and Creo, and both stocks are up significantly since that time. GSI Lumonics, a laser maker, is one of the fund's biggest holdings. He expects the stock price to rise further as a comparable U.S. company is trading at almost double GSI's valuation. He also anticipates further gains in Creo, an imaging and software technology company, as the U.S. economy improves and advertising picks up.
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